What Is CFIUS?

The Committee on Foreign Investment in the United States (CFIUS)
was granted authority to review foreign investment in existing U.S.
businesses under the Defense Production Act of 1950. CFIUS is an
interagency committee chaired by the U.S. Department of the
Treasury and comprised of representatives from 16 U.S. departments
and agencies, including the U.S. Departments of Defense, State,
Commerce and Homeland Security, among others. Before the Foreign
Investment Risk Review Modernization Act of 2018 (FIRRMA), CFIUS
jurisdiction extended to any transaction that would result in
foreign control over a U.S. business that impairs U.S. national
security. A transaction that poses a threat to U.S. national
security where the threat cannot be reasonably mitigated under
existing law or a CFIUS mitigation agreement may be referred to the
President of the United States with a recommendation to block the
transaction. Foreign investors should note that a review of a
"covered transaction" may be initiated any time after the
transaction closes, with no statute of limitations. The only
guarantee that a foreign acquirer will not be ordered to divest is
if the transaction has been reviewed, and not objected to, by
CFIUS.

FIRRMA: The New Era

FIRRMA Expands CFIUS Jurisdiction

President Donald Trump signed the John S. McCain National
Defense Authorization Act for Fiscal Year 2019 (NDAA) into law on
Aug. 13, 2018. Among other things, the NDAA contains FIRRMA, the
first major legislative reform impacting CFIUS reviews of foreign
acquisitions since Congress passed the Foreign Investment and
National Security Act of 2007 (FINSA).

The new law expands CFIUS jurisdiction, especially with respect
to real estate transactions and non-controlling interests in
businesses involved in critical infrastructure, critical
technologies and access to sensitive personal data. It also makes
certain filings involving foreign governments mandatory. Most of
the changes affect only procedure and funding for the Committee and
codify recent CFIUS practice. Nevertheless, FIRRMA brings important
changes to the law that all involved in foreign investments in U.S.
business should be aware of, and it does emphasize the continuing
shift of the CFIUS process from a technical exercise toward a more
political trade policy decision.

The most important changes brought by FIRRMA involve the
significant expansion of CFIUS jurisdiction to review certain real
estate transactions that were not previously of interest to CFIUS
and transactions not resulting in the foreign control of a U.S.
business.

The authority of the President of the United States to suspend
or prohibit certain transactions is provided in Section 721 to the
Defense Production Act of 1950, as amended (50 U.S.C. § 4565)
(the Act). Under the Act, the President can suspend or prohibit any
"covered transaction" when, in the President's
judgment, there is credible evidence to believe that the foreign
person exercising control over a U.S. business might take action
that threatens to impair the national security of the United
States, and the law does not otherwise provide adequate protection
against such action. FIRRMA modifies the definition of
"covered transactions."

Under the old standard, a "covered transaction" was
any transaction that was proposed, pending or concluded by, or
with, any foreign person, which could result in control of a U.S.
business by a foreign person. "Critical infrastructure"
was addressed within the context of a covered transaction and
defined as "a system or asset, whether physical or virtual, so
vital to the United States that the incapacity or destruction of
the particular system or asset of the entity over which control is
acquired pursuant to that covered transaction would have a
debilitating impact on national security." Thus, CFIUS
jurisdiction covered any acquisition of a U.S. business that would
result in foreign control and that might threaten U.S. national
security. It has long been the practice of the United States to
leave the term national security undefined to allow CFIUS and the
President maximum flexibility in asserting jurisdiction over
foreign acquisitions of U.S. businesses.

By enacting FIRRMA, Congress made certain practices explicit
and, in the process, expanded the reach of CFIUS. It did this by
amending the term "covered transaction" to include:

any non-passive investment by a
foreign person in any U.S. business involved in critical
infrastructure, the production of critical technologies or that
maintains sensitive personal data that, if exploited, could
threaten national security

any change in a foreign
investor's rights regarding a U.S. business

the purchase, lease, or concession by
or to a foreign person of certain real estate in close proximity to
military or other sensitive national security facilities, and

any other transaction, transfer,
agreement, or arrangement designed to circumvent or evade
CFIUS

These changes boil down to two major expansions of CFIUS
jurisdiction: 1) real estate transactions of developed and
undeveloped land, and 2) non-controlling
foreign interests in critical infrastructure, critical technologies
or sensitive personal data.

Real Estate Transactions: The Close Proximity Test

Until FIRRMA, CFIUS had jurisdiction over transactions that
involved a "U.S. business," i.e., a going concern. While
assets of a business that comprised most of the business would
qualify, the mere acquisition of land did not warrant, and was
specifically excluded from, CFIUS jurisdiction. However, during the
past few years, CFIUS has developed and applied the so-called
"locational test" and weighed in on transactions
involving the acquisition of a U.S. business in close proximity to
sensitive U.S. Government facilities.

FIRRMA takes this further. It expands the scope of CFIUS
jurisdiction to include any type of real estate
transaction, i.e., both developed and undeveloped real
estate. FIRRMA specifies that "CFIUS jurisdiction includes the
purchase, lease, or concession of private or public real estate
that: is located within, or will function as part of, an air or
maritime port; [or] is in close proximity to a U.S. military
installation or another facility or property of the U.S. Government
that is sensitive for reasons relating to national security."
Under the old statute, the acquisition of a building that might be
leased to a government agency would already fall within the purview
of CFIUS review as an ongoing concern. However, a piece of
undeveloped land on its own was specifically excluded from the
scope of CFIUS jurisdiction under prior law and regulations.

FIRRMA changes this. It not only codifies recent CFIUS practice
with respect to real estate businesses but also expands CFIUS
jurisdiction to allow CFIUS to block the purchase of even
undeveloped land that is in close proximity to a
U.S. military installation or another facility or property of the
U.S. Government that is sensitive for reasons relating to national
security. This is a significant change that, for the first time,
inserts CFIUS review into purely "greenfield" investment
in vacant land. This change allows CFIUS to speculate about the
potential use or development of land, or lack thereof.

Another major departure from the prior regime is the ability to
block the acquisition of non-controlling interests
in critical infrastructure, critical technologies or sensitive
personal data. Since its inception, it had been a hallmark of CFIUS
review that the foreign acquisition had to result in foreign
control, which could pose a threat to U.S. national security. This
is no longer the case.

Under FIRRMA, CFIUS jurisdiction now also includes any
foreign, non-passive investment in U.S. critical
infrastructure or critical technology, or a U.S. business that
maintains or collects sensitive personal data of U.S. citizens that
may be exploited in a manner that threatens national security. Such
non-controlling interests will include minority equity interests
with no board participation and no specific rights with respect to
major decisions of the business. In essence, FIRRMA moves the focus
from control to influence.
Removing the control test will greatly expand the number of
reviewed and reviewable transactions, particularly in the high-tech
startup sector.

Voluntary and Mandatory Filing of Declaration

In addition to these substantive changes, FIRRMA also makes
several procedural changes to CFIUS reviews. First, it creates a
new, short form of filing (a "declaration") that will
contain basic information regarding the transaction. These
declarations are filed in three instances:

Parties may voluntarily submit such a
declaration to request that CFIUS determine whether a full, formal
filing is necessary. CFIUS is required to take action within 30
days following receipt of a declaration.

Parties must submit
a declaration in certain government-control cases
involving the acquisition of a "substantial interest" in
a U.S. business by a foreign person in which a foreign government
has a "substantial interest."

Parties must submit
a declaration in transactions identified in implementing
regulations (e.g., pilot programs as discussed in more detail
below).

FIRRMA authorizes CFIUS to impose civil penalties on any party
that fails to comply with the mandatory declaration requirement.
Furthermore, parties to covered transactions that are subject to
the mandatory declaration requirement may elect to submit a full
written notice instead of a declaration.

Procedural Changes

In addition, FIRRMA implements a number of procedural
changes.

Expanded Timeframe for CFIUS
Review: Previously, CFIUS undertook an initial 30-day
review, with the option for an additional 45-day investigation.
FIRRMA extends the review period to 45 days, retains the 45-day
optional investigation period and authorizes a one-time extension
of 15 days in "extraordinary circumstances," as defined
in the CFIUS regulations.

Timing for Review of Draft
Filings: FIRRMA requires that CFIUS provide comments on
draft notices that parties submit in advance of formal filing
within 10 business days.

Timeline for Acceptance of
Formal Filings: FIRRMA requires that CFIUS accept formal
filings within 10 business days and start the official review
period clock.

Authority to Suspend
Transactions: FIRRMA provides the authority for CFIUS to
suspend transactions or refer transactions to the President prior
to the conclusion of the full review period.

Filing Fee:
Previously, there was no filing fee for submitting a notice to
CFIUS; however, FIRRMA permits CFIUS to assess a fee of no more
than 1 percent of the transaction or $300,000, whichever is
less.

Committee on Foreign
Investment in the United States Fund: FIRRMA provides for
the creation of a funding mechanism to be administered by the CFIUS
chairperson and authorizes $20 million in appropriations to this
fund for each of fiscal years 2019 through 2023 for CFIUS to
perform its duty.

Expanded Reporting
Requirements: FIRRMA requires that CFIUS produce a report
biannually (through 2026) that analyzes and includes information on
investment in the United States by Chinese entities.

Voluntary and Mandatory
Declarations: As discussed above, parties would be given
the opportunity to file a short-form declaration to obtain
CFIUS' view on whether a transaction is subject to review.

Monitoring
Mechanism: FIRRMA requires that CFIUS create a monitoring
mechanism with respect to transactions where the parties have not
filed a notice with CFIUS.

CFIUS Pilot Program: The Future Is Now

Because of the extensive changes to the legal regime of CFIUS,
some of FIRRMA's most significant provisions will not be
effective until 18 months following the enactment of FIRRMA (i.e.,
Feb. 13, 2020); or 30 days after the U.S. Secretary of the Treasury
publishes in the Federal Register a determination that the
necessary regulations, organizational structure, personnel and
other resources are in place to administer those provisions of
FIRRMA (whichever is sooner). Notwithstanding this, in recognition
of the need to immediately assess and address significant risk to
national security posed by some foreign investment, FIRRMA also
authorizes CFIUS to conduct one or more pilot programs to implement
any provisions of the legislation before FIRRMA becomes fully
effective.

The First CFIUS Pilot Program

The first CFIUS pilot program was announced on Oct. 11, 2018,
and became effective on Nov. 10, 2018. The pilot program expands
CFIUS' jurisdiction to include certain
non-controlling investments by the foreign
investors in a U.S. business that produces, designs, tests,
manufactures, fabricates or develops one or more critical
technologies that is either utilized in connection with the U.S.
business' activity, or designed by the U.S. business
specifically for use, in one or more of 27 pilot program
industries, and affords the foreign investor any of the following
rights:

access to any material nonpublic
technical information in the possession of the pilot program U.S.
business (does not include financial data)

membership or observer rights on the
board of directors or equivalent governing body of the pilot
program U.S. business, or the right to nominate an individual to a
position on the board of directors or equivalent governing body of
the pilot program U.S. business

any involvement, other than through
voting of shares, in substantive decision-making of the pilot
program U.S. business regarding the use, development, acquisition
or release of critical technology

Under FIRRMA, "critical technology" is defined with
reference to existing control regimes, among others. Consistent
with FIRRMA, the definition of "critical technology" in
CFIUS' regulations has been updated to include:

Defense articles – U.S.
Munitions List

Dual-use technology – Commerce
Control List

Nuclear equipment, materials,
software, technology

Select agents and toxins

Emerging and foundational
technologies (Export Control Reform Act of 2018)

As to pilot program industries, CFIUS has developed the list of
27 industries for which certain strategically motivated investment
could pose a threat to U.S. technological superiority and national
security, including aviation, defense, semiconductors,
telecommunications, batteries, biotech, nanotechnology, among other
strategic industries where the U.S. wants to keep its technological
edge.

Pilot Program U.S. Business

A U.S. business meets the definition of a "pilot program
U.S. business" if it produces, designs, tests, manufactures,
fabricates or develops a critical technology that is 1) utilized in
connection with the U.S. business' activities in one or more
pilot program industries, or 2) designed by the U.S. business
specifically for use in one or more pilot program industries.

The first step is to determine, if not already known, whether
the U.S. business produces, designs, tests, manufactures,
fabricates or develops a critical technology. This will involve
considering everything that the U.S. business produces, designs,
tests, manufactures, fabricates and develops, and determining
whether anything falls within the definition of a "critical
technology."

If a U.S. business produces, designs, tests, manufactures,
fabricates or develops one or more critical technologies, the next
step is to determine whether the U.S. business utilizes any of
those critical technologies in connection with its activities in
one or more pilot program industries (i.e., the 27 industries
identified by CFIUS). If so, the U.S. business is a pilot program
U.S. business.

If not, the final step is to determine whether one or more of
the critical technologies produced, designed, tested, manufactured,
fabricated or developed by the U.S. business is designed by the
U.S. business specifically for use in one or more pilot program
industries, irrespective of whether such use is by the U.S.
business itself or by another person. If so, the U.S. business is a
pilot program U.S. business.

Pilot Program Covered Transaction

If the U.S. business is a pilot program U.S. business, certain
non-controlling investments by the foreign investors in said
business which affords the foreign investor the right to 1) access
any material nonpublic technical information of the pilot program
U.S. business, 2) membership or observer rights on the board of
directors or equivalent governing body of the pilot program U.S.
business, or the right to nominate an individual to a position on
the board of directors or equivalent governing body of the pilot
program U.S. business, or 3) any involvement, other than through
voting of shares, in substantive decision-making of the pilot
program U.S. business regarding the use, development, acquisition
or release of critical technology, will be deemed as a
pilot program covered transaction. The pilot
program requires that the parties to a pilot program covered
transaction file a declaration with CFIUS (i.e., the mandatory
declaration requirement under the pilot program).

Treatment of Certain Investment Fund Investments

The pilot program exempts certain indirect investments made
through an investment fund by a foreign person in a pilot program
U.S. business that affords the foreign person membership as a
limited partner or equivalent on an advisory board or a committee
of the fund from being considered as a pilot program covered
transaction, if:

the fund is managed exclusively by a
general partner, a managing partner or an equivalent who is not a
foreign person

neither the advisory board or
committee, nor the foreign person, has the ability to approve,
disapprove or otherwise control the investment decisions of the
investment fund or its portfolio companies

the foreign person does not otherwise
have the ability to control the investment fund, including the
right to unilaterally dismiss, prevent the dismissal of, select or
determine the compensation of the general partner

the foreign person does not have
access to material nonpublic technical information as a result of
its participation on the advisory board or committee

The pilot program also exempts investment involving an air
carrier.

Mandatory Declaration of Pilot Program Covered Transaction

As mentioned above, the pilot program mandatorily requires that
parties to a pilot program covered transaction submit a declaration
to CFIUS. Parties may, however, elect to submit a full written
notice instead of a declaration. Parties will need to consider at
the outset whether to submit a declaration or a full written notice
based on the complexity of the transaction, timing considerations
and other relevant factors. A full written notice may be more
appropriate than a declaration when the parties believe that CFIUS
may require more extensive information to analyze potential
national security risks.

Upon the receipt of the declaration from the parties, CFIUS has
30 days to clear the transaction based on the declaration, initiate
a unilateral review of the transaction or require the parties to
file a full written notice.

Any person who fails to comply with the filing requirements may
be liable for a civil penalty up to the value of the pilot program
covered transaction.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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